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Trading Halts 101: The Basics You Need To Know

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Trading Halts 101: The Basics You Need To Know
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Trading halted!

But don’t panic. In fact, the whole idea is to prevent any such anxiety.

Stock markets, exchanges and the U.S. Securities and Exchange Commission are authorized to suspend trading on individual securities to protect investors and level the field between informed, reactive traders and those lagging on relevant news.

Halts may occur if a stock fails to meet regulatory requirements, in advance of price-moving company announcements, or to correct an imbalance from inordinately heavy volumes.

Classified as “regulatory” or “nonregulatory,” each halt is labeled with a code indicating its circumstances. For example, T1 indicates a halt with news pending, T2 a halt with news released, H4 a halt due to non-compliance with listing requirements, and H10 a halt imposed by the SEC.

Regulatory Halts

When companies go public, they agree to provide affiliated stock markets advanced notice of price-busting news, such as significant changes in finances or management, restructurings, mergers or product updates.

The markets evaluate corporate reports and determine whether the potential impact merits a halt. They can also suspend trading on already public information or in response to major events beyond corporate control, such as business-affecting natural disasters.

Related Link: The T-12 Nasdaq Halt: When Stocks Get Called To The Principal’s Office

Other markets trading the security are obliged to enforce concurrent pauses. The authorizing halter will reopen trading based on its own assessment, at which time all other listings can resume.

Market authorities can also halt trading if there are concerns over a security’s compliance with listing standards.

The SEC, for example, can suspend stock activity for up to 10 trading days if it registers risk to the investing public based on a variety of factors, including suspected stock manipulation and poor timeliness or quality of a firm’s required filings.

Non-Regulatory Halts

Some halts will automatically occur when a security hits its daily trading limit and expends its allotted trading contracts for a particular session. These limits safeguard from extreme volatility.

Additionally, if a company announces significant news after trading closes, exchanges might then delay the opening of the security the next day to correct imbalances from off-hour orders. These halts are not obligatorily enforced on peripheral markets.

Non-regulatory halts are exclusive to exchanges such as the New York Stock Exchange and cannot be imposed by stock markets, such as the Nasdaq.

For this reason, Nasdaq halts are known always to precede announcements, while NYSE halts may merely signal high volatility.

While most volatility-based halts are stock-specific, there are also market-wide circuit breakers, which are approved by the SEC to prevent volatility-inspired panic trading. Circuit breakers, or “collars,” were first imposed after the 1987 market crash and now occur when prices hit predetermined thresholds. The length of suspension depends on the percentage of movement and the time of occurrence.

The Implications

While a security is halted, brokers cannot publish quotations or indications of interest, but not all activity is inaccessible. Investors can cancel open orders or partake in options trading.

Trading generally resumes within the hour and often occurs on rectification of halt-worthy conditions.

Posted-In: NASDAQ New York Stock Exchange NYSEEducation Top Stories SEC Markets General Best of Benzinga

 

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